Sebi moots steep rise in net worth base for brokers

Brokerages say the proposed move may stifle competition

The Securities and Exchange Board of India (Sebi) has proposed a multifold increase in the net worth requirement for stockbrokers. The move comes amid a spate of defaults by brokers and also several instances of misuse of client securities.

The net-worth requirement for brokers currently differs for each segment and also on functions they perform. For instance, a socalled professional clearing member (PCM) or a trading and clearing member (TM & CM) is required to have a net worth of ~3 crore for the cash segment and another ~3 crore for the equity derivatives segment.

Sebi has proposed that the base net worth for PCM should be increased to ~25 core by October 2022 and further to ~50 crore a year later. Some large brokers may even have to show a higher net worth if the 10 per cent of the average daily cash balance of the clients they retain exceeds ~50 crore or other slabs prescribed by the regulator.

In a discussion paper, the markets regulator has said the current net worth thresholds were set two decades ago and given the increase in the number of new accounts, there is a need for a relook at these parameters.

“The failure of capital market intermediaries to meet client obligations may arise out of the operational risk, using client money for other clients, or proprietary trading. The current minimum capital norms do not adequately address these risks,” the regulator stated, inviting public feedback until October 18.

The regulator has said balance sheets of brokers are required to be monitored and commensurate with the operational risk they take with respect to their clients.

Industry players, on the other hand, complained that the latest proposals would put further pressure on brokers who are already grappling with several regulatory changes.

Some players have questioned the timing of the move. “After the introduction of pledge/repledge norms and barring brokers from accessing client securities, risks have gone down significantly. Most brokers act as pass-through intermediaries. Higher base capital norms will reduce the number of players in the segment, and stifle competition and innovation,” said a founder of a small-sized brokerage.

Since the Covid-19 outbreak, the industry has seen a record number of first-time investors. “(Given) the significant increase in the number of investors participating in the securities market, it seems appropriate that a review of net worth of the members (is conducted)… it is observed that existing base net worth requirements are very minuscule compared to the business that TMS are undertaking and the number of clients that they have,” Sebi has said.

In recent years, Sebi has hiked the necessary net worth for several other intermediaries. In 2014, it increased the net worth requirement for asset management companies from ~10 crore to ~ 50 crore. In 2019, the net worth requirement for portfolio managers was revised from ~2 crore to ~5 crore and that of credit rating agencies was also revised from ~5 crore to ~25 crore.

Sebi has said a higher net worth requirement for the broking industry would ensure client safety. “Handling of funds and securities results in their clients having a credit exposure against them. From the point of view of market safety, it is crucial that the risk of loss of clients’ assets in the event of default by the intermediary is mitigated, regardless of such default being on account of own trading or non-trading losses of the intermediary or due to default of another fellow customer,” the regulator has said.

Sebi has also proposed to increase the net worth requirement for stock brokers who act as depository participants to ~5 crore from October 2023 onwards.

The regulator has said the computation of networth would be based on the recommendations made by the L C Gupta committee.